Final answer:
A natural monopoly arises in market conditions where a single firm can supply the market more efficiently than multiple firms due to economies of scale. This usually occurs in industries with high fixed costs and low marginal costs, leading to regulated monopolies in sectors such as utilities.
Step-by-step explanation:
Natural monopolies arise in industries where the cost structure and market demand create conditions such that a single firm can supply the entire market more efficiently than multiple firms. These monopolies form when there are significant economies of scale, meaning that as a firm increases production, the average cost per unit decreases, to a point where one firm can operate at the minimum of the long-run average cost curve. This is often the case in industries with high fixed costs and low marginal costs for serving additional customers, such as utilities. For example, after a water company has laid down the water pipes, the marginal cost of providing water to an additional home is relatively low. The formation of natural monopolies can lead to a market where competition is unlikely because new entrants would have to incur significant costs to establish their presence, resulting in duplicate capital investments which are economically inefficient.
In the United States, such monopolies are typically regulated to prevent abuse of monopoly power. If a natural monopoly were to be divided among multiple companies, the average cost of production would increase, leading to higher prices for consumers.